Introduction

Harris Williams & Co. is pleased to present its chemicals and specialty materials industry update for Q1 2018. This report provides commentary and analysis on current market trends and merger and acquisition dynamics within the global chemicals and specialty materials industry.

Beyond the longstanding backdrop of significant debt and equity capital, tax reform in the United States has created an even more favorable environment for companies looking to expand production, which has nicely coincided with increased global demand for chemicals and specialty materials. Moreover, the American Chemistry Council (“ACC”) projects national chemical production (excluding pharmaceuticals) to rise 3.7% in 2018 as a result of higher demand across major end markets as well as capacity additions as larger corporations continue to spend significant amounts of capital to increase production.

Given these factors as well as other tailwinds, deal activity in the chemicals and specialty materials sector has remained at elevated levels throughout the first quarter of 2018. After having recently announced our role as exclusive advisor to EP Minerals in the company’s pending sale to U.S. Silica, our team continues to be very active with several ongoing opportunities in the space, pointing to another busy year in 2018.

We hope you find this edition helpful and encourage you to contact us if you would like to discuss our perspective or our relevant industry experience.

Q1 2018 By the Numbers

What We're Reading

Key Observations and Themes

  • Increased Capacity: U.S. chemical manufacturers are increasingly looking to take advantage of new tax legislation, encouraging heightened capital expenditures

  • Steady Growth: Global markets continue to demonstrate positive momentum, especially in construction and automotive end markets

  • Aggressive M&A Efforts: M&A activity has become a prolific growth strategy for larger chemical and specialty materials manufacturers looking to augment organic growth

Akzo Nobel reshapes business with 10 billion euro sale

Reuters - March 27, 2018

"Akzo Nobel will sell its chemicals business in a 10.1 billion euro ($12.6 billion) deal to buyers led by Carlyle Group, the maker of Dulux paints said on Tuesday, making good on a promise made as it fought off a takeover last year. The sale of the Specialty Chemicals operation to Carlyle and Singapore’s GIC sovereign wealth fund for a slightly better than expected price will allow Akzo to focus on its main paints and coatings business. It delivers one of the biggest commitments made by Akzo Nobel in its defense against a 26 billion euro ($32 billion) takeover offer from U.S. rival PPG Industries last year." Read the full article here.

EU Greenlights $66 Billion Bayer-Monsanto Deal

Financial Times - March 21, 2018

"Bayer has received the green light from the EU to buy Monsanto, after promising to sell off substantial parts of its business, clearing a major hurdle to the last of a trio of mega-mergers consolidating the global agrochemical industry. The German company promised to sell some of its herbicide and seeds businesses to rival BASF to alleviate the watchdog’s concerns that the tie up with the giant American agribusiness would cut competition in the EU and lead to higher prices, lower quality, a cut in choice and less product innovation. Bayer will also license BASF its digital farming portfolio." Read the full article here.

Dow Chemical’s Andrew Liveris to Depart; Jim Fitterling to Be CEO of New Dow After Breakup

Wall Street Journal - March 12, 2018

"Longtime Dow Chemical Co. leader Andrew Liveris plans to step down next month, ending a nearly 14-year tenure that culminated with the chemical giant’s combination last year with rival DuPont Co. Liveris lieutenant Jim Fitterling will be chief executive of the materials-science company that is expected to be created when the breakup takes place next year. This unit encompasses the majority of Dow’s legacy businesses – producing a broad range of chemicals across a wide range of end markets – and will retain the Dow brand." Read the full article here.

Linde, Praxair Kick Off $8 Billion in Asset Sales

Bloomberg - March 1, 2018

"Linde AG and Praxair Inc., awaiting regulatory approval for their combination, have started the sale of European and U.S. industrial gas assets that may fetch about $8 billion, according to people with knowledge of the matter. The portfolio is attracting interest from rivals such as Air Liquide SA, Air Products & Chemicals Inc., Germany’s Messer Group GmbH and Taiyo Nippon Sanso Corp.’s Matheson Tri-Gas unit, said the people, who asked not to be identified because the talks are confidential. Private equity firms including KKR & Co. and Carlyle Group LP are also weighing bids, they said. Buyout firm CVC Capital Partners is working with Germany’s Messer, they said." Read the full article here.

Public Comparables

HW&Co. Commentary

  • Chemicals and specialty materials public companies are currently trading at an overall median of 9.6x NTM EBITDA
  • Strong year-over-year performance across all chemical sectors driven by strength in the global economy, especially in emerging markets where industrial production has shown increased momentum
  • Commodity chemicals performance dipped in Q1’18 following relatively soft Q4’17 earnings releases, primarily driven by higher than anticipated raw material prices
  • Tax reform in the U.S. has favored the majority of chemical corporations worldwide
  • However, the U.S. administration’s proposed Chinese import tariffs have negatively impacted most chemical stocks and could increase plant construction costs

Public Markets Overview

Global uncertainty driven primarily by geopolitical events has led to recent declines in the broader chemical industry, however all major chemical indices remain above prior-year levels

HW&Co. Deal Spotlight

Harris Williams & Co. announces that it is exclusively advising EP Minerals, LLC (EP Minerals), a portfolio company of Golden       Gate Capital, on its pending sale to U.S. Silica Holdings, Inc. (NYSE:SLCA; U.S. Silica). The transaction, which is subject to   customary closing conditions, is being led by Patrick McNulty and John Lautemann of the firm’s Chemicals and Specialty Materials   practice, as well as Tim Webb and John Neuner of the firm’s Richmond office.

EP Minerals – with sales of over $200 million – is a global producer of engineered materials derived from industrial minerals   including diatomaceous earth (DE), clay (calcium bentonite), and perlite.  The company is the number one or number two player in   each of its global markets. Similar to U.S. Silica's Industrial and Specialty Products (ISP) segment, it has transformed from a   commodity-based business by adding new, value-added products to its mix, developing over 50 new products in the last three years.

''EP Minerals checks all of the boxes in terms of what we've been looking for in an attractive, adjacent business to our ISP segment,'' said Bryan Shinn, president and chief executive officer of U.S. Silica. ''It is a rare find with an attractive market structure and has industry-leading margins with exciting opportunities to grow sales.”

Recent M&A Transactions

The information included in this Industry Update was sourced from FactSet.